North Sea oil has returned to the heart of the independence debate after a leading think-tank said rising prices could see Scotland's public finances look their healthiest for more than a decade, just before Nicola Sturgeon wants to hold a second referendum.
The Institute for Fiscal Studies (IFS) said the upturn in oil and gas revenues would cut Scotland's notional deficit close to, or even below, the UK level next year, the first time this has been achieved since the early 2010s.
IFS Associate Director David Phillips said that when the figures are published next August they could paint a "relatively rosy picture" for the Yes campaign.
Ms Sturgeon has said she wants to hold Indyref2 in October next year if it is legally possible.
However, the IFS also said that even if oil prices stayed high, revenue would fall away as North Sea production declined, and an independent Scotland would still face having to cut services or raise taxes, albeit it at a potentially slower rate than previously thought.
Nevertheless, it presents the SNP with a timely short-term boost as it tries to persuade voters an independent would be able to weather the economic crises buffeting the UK.
However if the SNP revive oil as a key plank of the independence campaign it risks creating friction with their partners in government, the Scottish Greens, who want less oil drilling due to climate change.
Deputy First Minister John Swinney yesterday refused to rule out basing the prospectus for independence on spending more oil revenue, despite the SNP's own Growth Sustainable Commission saying it should be set aside as a bonus for long-term investment.
Mr Swinney, who is acting Finance Secretary while Kate Forbes is on maternity leave, refused to restate the Growth Commission's position as he dodged questions on the prospectus, saying: "We'll publish the document when we publish the document."
While stressing the need for a just transition to net-zero carbon emissions by 2045, he added: "We have a strong [oil and gas] sector. It is contributing formidably towards the public finances of Scotland and the United Kingdom to an increasing extent. We will see that even more during this current financial year."
The IFS made its comments after the publication of the annual report on Scotland's public finances, Government Expenditure and Revenue Scotland (GERS) yesterday.
It showed the country had a doubledigit deficit for the second year in a row in 2021-22, but it was markedly smaller than the record gulf between income and spending the year before caused by the Covid pandemic and the economic shock of lockdown.
The main driver of Scotland's improved position is higher North Sea oil and gas revenue, which jumped by £2.7 billion to £3.5bn, its highest level since 2013-14.
Including a geographical share of North Sea revenue, Scottish tax revenue was 8 per cent of the UK total, its highest level since 2014-15.
Mr Swinney said Scotland's fiscal position was recovering "faster" than the UK's, citing a 10.3 percentage point drop from 22.7% of GDP in 2020-21 to 12.3% of GDP last year. This compared to a drop of 8.4 points for the UK deficit, from 14.5% to 6.1% of GDP. In cash terms, the UK deficit per person fell faster than Scotland's.
Onshore growth and income tax revenues were also weaker for Scotland than for the UK.
Mr Swinney said the improvements were "before the full impact of the rise in oil prices that we've seen more recently, which is likely to see Scotland's deficit fall faster than the UK's again next year, with oil and gas revenue set to grow to £13bn this year.
"The figures also highlight how the UK's response to the cost crisis is being built on Scotland's natural resources, not least with its windfall tax on the North Sea."
He added: "Even in the midst of an energy crisis, the UK as a whole is benefitting from Scotland's natural wealth - which is why Scotland can expect its deficit to fall further in the future."
He also said GERS reflected Scotland's finances inside the
Union, not under independence. The IFS said the fall in Scotland's notional deficit reflected a rebound in North Sea revenues, which are "overwhelmingly generated in Scottish waters", plus stronger growth in GDP following a bigger fall in 2020-21.
However, onshore revenues grew less quickly and government spending fell by less in Scotland than in the UK as a whole.
The think-tank said Scotland's underlying public finances were set to improve "significantly further" in 2022-23.
"Indeed, for the first time since the early 2010s when oil prices and taxes were last this high, Scotland's underlying deficit is likely to be similar to, and perhaps even smaller than, that of the UK as a whole."
However, it warned oil and gas prices were expected to fall back after a few years, and that North Sea output is in long-term decline.
Mr Phillips of the IFS said: "Figures for the current financial year, 2022-23, will come just before the date the Scottish Government hopes to hold a referendum on independence. That timing could be fortuitous for the Yes camp as further increases in oil and gas prices, together with the windfall tax on the profits of oil and gas producers, mean Scotland's headline overall deficit could be at a similar or even lower level than the UK as a whole for the first time in over 10 years.
"But the long-term decline in North Sea output means that even if these higher prices are sustained, at best they would buy the government of an independent Scotland more time to boost onshore economic growth and revenues.
"Without this, an independent Scotland would still likely face bigger tax rises or spending cuts in the decades ahead."
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